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Fear Of Opening The Floodgates Law General Essay

The key concern of opening the floodgates perform on a number of levels. It is demonstrated in the administrative concern that the legal system will be flooded and will not be able to recover, public interest and society whether liability will be able to operate as barrier to the progressive activities and as a part of a properly functioning society. Practical justice fears possible deception of limitless liability.

The case of Victorian Railways Commissioners v Consultants (1888) is the origin of "floodgates argument". The biggest concern of the courts was that nervous shock or later economic loss cases could bring up the flood of similar cases. Sometime after, courts figured a way to hold back different cases using ‘policy decisions’. The concern of ‘opening the floodgates’ of liability was highlighted by many ‘crises’ in the late 1980s in the insurance industry, which were presented by the near bankruptcy of the Lloyds of London insurance market in the 1990. It was said that there were other factors playing role in the events that year, such as economic condition and natural disasters. It was also suspected that tort law contributed as well by "encouraging the spread of third party or liability insurance at the expense of first-party or loss insurance". It is easier to guess potential losses of an individual then all the other people to whom the insured might be liable.

The economic loss goes back as far as acknowledgement of negligence. Over the years judges struggled in establishing the boundaries of what we can call economic loss and how limited it should be. In relation to restricting negligence claims for economic loss, there was a case of Hedley Byrne v Parters, which removed the restriction of a ‘general exclusionary rule’ in relation to claims of economic loss, which up until then was ruled by the case of Derry v Peek. The reasoning behind exclusionary rule was said to be a ‘policy consideration of indeterminate liability’. Nowadays, this principle is referred to as "floodgates principle". In the case of Hedley Byrne v Parters, Lord Morris stated: "…if someone possessed of a special skill undertakes, irrespective of contract, to apply that skill to the assistance of another person who relies on such a skill a duty of care will arise". It was the beginning of the category of negligent misstatement, where in case of existence of this new relationship and no appearance of any disclaimers, a person is able to look for compensation for economic loss. This case might be interpreted in two ways. Some criticized its lack of requirement to be unambiguous under contract as opening the floodgates. However, it limits the ability to claim by stating that the defendant must be skilled in the area commenting on.

Dominant floodgates problem involving economic loss is that the defendant could be subject to very heavy burden in damages as a result of the ‘ripple effect’. Countless professions could be driven out of the business by the imposition of liability for pure economic loss. However, there are many other countries in Europe which impose such liability and do not experience any problems with the businesses concerned. Subject to fault-based liability and standard of care would be effectively set by their equal associates under the Bolam test. It is worth to remember that there is no strict liability. In negligence the imposition of duty of care, itself, does not impose liability. The defendant must be proven to fall below the required standard of care.

When the ‘floodgates argument’ is mentioned in the courts decisions it is often believed that the problem is obvious or at least clearly concentrated in terms of acceptance of exposing defendant to the potential liability ‘in an indeterminate amount for an indeterminate time to an indeterminate class’. However, the problem is not so simple and it is believed that a big contribution to current problems was lack of judicial analysis in the economic loss field.

Courts acknowledged the problems which might arise if there are no rules to limit potential liability. American Judge Cardozo CJ made a commentary in the case of Ultramares Corporation v Touch, highlighting unpleasant position of exposing defendants to potential liability of an "indeterminate amount for an indeterminate time to an indeterminate class". We can assume from this statement that Cardozo CJ was not opposed to the idea of claiming for economic loss, but he was firmly suggesting that this ability should also be regulated. His comment has been quoted by English judges on many occasions, as a summary of consequences of Lord Atkin’s ‘neighbour principle’. Neighbour principle, laid down in the case of Donoghue v Stevenson (1932) could be applied without restrictions, therefore, it opened the door in negligence for injured parties, whether was it primary victim directly affected by the negligent act or secondary victim directly affected by witnessing that crime.

One aspect of the concern about remoteness of damage is the "opening of the floodgates" argument. In this concern there is unfairness involved in holding defendants liable to indeterminate number of claimants and claims of indeterminate size. Although, this two issues need to be dealt with separately as both of them on its own can be objectionable.

The indeterminate number of claims problem could be served by an example of that a car manufacturer cannot be liable for potential economic loss if one of the cars has a defect and as a result causes dysfunction on one of the highways during rush hour. There is no objection to the large number of claims, but it is unforeseeable to know when the blockage will occur and if that will be either rush hour or middle of the night. Therefore, it is unpredictable how many vehicles will be held up and how big the volume of potential claims might be. That can be for a loss of wages, profits etc. There is also possible ‘ripple effect’ as economic loss might ripple down a chain of parties.

Indeterminacy of each claim is the second floodgate concern, which usually arises in lost profit cases. It is said that for claimant is easier to foresee the likely amount of lost profit while the defendant is unable to guess and take preventative action. It is necessary for no-liability rule to keep up a realistic limit on damages. It is unfair to ask defendant to take into the account expectations of people with whom they are not in privity. For example person receiving negligent investment advice, who is relying on it and as a result enter speculative transactions of which the adviser had not had reasonable notice.

Both forms of floodgates might be not as much threating as it was feared in lost profit cases. The current belief of Hose of Lords accepts that drawing a line between economic loss and physical damage cannot be justified "on any intelligible principle". It acknowledges existence of floodgates problem related to economic loss claims, but recognises it as manageable threat and is in favour of allowing some claims which would allow recovery in negligence, but only in carefully chosen typed of case where such problems are absent or controlled.

In Caparo Industries v Dickman there was insufficient proximity between Caparo and the auditors. The reason for that is Caparo did not fall within the reason for producing the report. The report was produced in order to allow shareholders to hold the company to account and not to inform investment decisions. On the other hand, using the reasoning in Hedley Byrne, the auditors should have realized that people will use that document for investment decisions. That is one of the cases where fair, just and reasonable requirement was used to prevent the floodgates. This is the policy consideration, which is relevant to all negligence cases despite the nature of the harm sustained by the claimant. In order to decide if it is fair, just and reasonable to impose duty of care, the courts need to consider all circumstances (Marc Rich). In Marc Rich, defendant’s negligence resulted in allowing ship to leave the port; even that it was not seaworthy. As a result the ship sank. It was held duty of care did not exist as the relationship between the cargo owners and shippers was already governed the internal Convention. The House of Lords held that "to impose duty of care would upset the apportionment of responsibility between the parties as laid down in legislation".

The risk of floodgates is major factor for saying that duty of care is not fair, just and reasonable. For example in Caparo, if auditors had a duty of care, which spread beyond meaning of the document, there would have been an indefinite number of potential claims. Lord Olivier who rejected the existence of duty of care in Caparo, argued: "To apply as a test of liability only the foreseeability of possible damage without some further control would be to create a liability wholly indefinite in area, duration and amount and would open up a limitless vista of uninsurable risk for the professional man". As we can assume from the above statement, Lord Olivier feared that if new kind of ‘uninsurable risk’ was opened, in order to the detriment of society as a whole, the professionals would discontinue supplying the information in question.

Very common is belief that to permit recovery of pure economic loss in some cases would allow infinity of claims that would give the courts load of work. As an example if because of the defendant’s negligence a busy motorway or trading markets are closed, there might be thousands people suffering economic loss. Assuming that most of these cases would reach the court, it could result in ‘administrative chaos’. It is also said that it is unfair for the defendant, as it might be impossible for the defendant to predict how many economic losses claims he might face. Increasing tort liability by claiming economic loss claim is a modern trend, which needs to be kept under control.

Difference between economic loss and, for example physical injury is that the negligent act will cause only one accident. If we want to apply that to the cases of psychiatric injury, the reason behind that thinking is logical for less sophisticated age. As an example if defendant will ride his/hers motorbike negligently, the number of people that could be injured is very limited. However, a person standing away from the highway, not in the risk of being physically injured, might still be at risk of nervous shock if he/she witnessed an accident. However, it might not apply any longer in a more technologically advanced age. Currently, even small mistake might be a negligent act which might cause damage to property or person or many properties and many people. For example explosion of a nuclear reactor in Chernobyl on 26 April 1986, where there were many injured people and it was unpredictable how many physical injury, economic loss claims and also psychiatric injury claims there might be. However, it was said that "multitude of claims from the once incident is not a ground on which the courts would deny relief in actions for physical injury or property damage caused by such an accident".

The courts have restricted the duty of care in psychiatric injury cases. Even that they have been viewed sceptically for many years, now have been accepted into the law of negligence. Although, it is necessary for the condition to be recognised as psychiatric condition, not like in case of ordinary stress or anxiety after witnessing some traumatic situation. Due to risk of floodgates, there are extra requirements for ‘secondary victims’, known as proximities of the relationships, perception and time and space.

The argument of ‘opening the floodgates’ was criticised on many occasions, by the number of judges (see McLoughlin v O’Brien, Lord Edmund-Davies (at 425) and Lord Bridge(at 442) and the Commission considered that requirement of recognised psychiatric injury might be enough. Medical studies and literature proves that exaggerated and fraudulent claims are not common, plus Commission did not see ‘any greater significance of conflicting medical opinions than in a case of physical injury’. Also there is not much consideration given to suggestion that physical injury is more important than psychological one, because, as Commission cited the cogent argument of Mullany and Handford that "an injured mind is far more difficult to nurse back to health than an injured body". Lastly, as the Commission stated the fact that the claimant is usually a secondary victim is the floodgates argument in disguise. Nevertheless, that is the floodgates argument which convinced the Commission that the proximity tests should still remain in psychiatric injury cases and foreseeability alone is not enough.

Very crucial question, asked by Nolan LJ, in the case of Alcock v Chief Constable of South Yorkshire Police, is the "breadth of the terms in which the question is answered". Feelings such as anxiety, fear or sorrow are part of the human nature and are therefore ever-present. Although, it has been noted that it is extremely rare for an individual suffering a ‘pathological reaction to traumatic stresses’, to be incapable of restoring the balance of their emotions and feelings. It is a mistake to believe that based only on the fact that physically injured person has a family, that every member or even most of them will suffer a pathological reaction as a result of the accident. It is acceptable though, that the members of that family will experience some unpleasant emotions. However, there is no proving that situations like this might open the floodgates. Therefore, fear of opening them too wide should be allayed by acknowledgment that many will pass the first level to establish the necessary degree of injury.

There is one argument in favour of ‘floodgates argument’ which is that "the courts would be inundated by claims if a right of action was granted". That is not entirely true, as once a law is established, most claims will be settled and courts will have no problem. Simon Deakin stated "…the topic (restrictions in economic loss) remains a fertile ground for disputes and controversy". Now we have figured the tight restrictions proposed by Cardozo, some even saying that it has gone too far (Elliott& Quinn, 2009). It seems like "the courts has relied on floodgates argument to protect itself from an excessive workload". That statement raises questions about separation of powers and how far courts can go to ensure their ability to organize and manage justice.

The effect of more than three decades of litigation is, however, "a complex, uncertain and anomalous pattern of decisions. The key to understanding them is to see how the question of duty of care has been approached in economic loss cases; for what has evolved and has now been expressly approved by the House of Lords is an approach which starts with the selection of the ‘relevant’ case law".

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